A Third of Poorest Area Councils Teeter on Brink of Bankruptcy

Financial Strain Plagues Poorest Councils

At least 30 percent of councils located in some of the most economically disadvantaged areas of the country are currently contemplating the prospect of declaring effective bankruptcy either this year or the next, according to a recent revelation.

Survey Highlights Alarming Trends

A comprehensive survey encompassing 47 local authorities situated in the North, the Midlands, and along the South Coast has unveiled the profound financial challenges these councils are grappling with. Out of these, five councils are in the midst of deliberating whether to issue a section 114 notice, which signifies their inability to balance their annual budget for the upcoming fiscal year 2023-24.

Growing Concerns for Future Bankruptcy Declarations

In addition to the current predicament, nine councils affiliated with the Special Interest Group of Municipal Authorities (Sigoma) have indicated the possibility of having to declare bankruptcy in the ensuing year. This dire situation marks the first instance that numerous member councils are contemplating the issuance of a section 114 notice, a measure that freezes all non-essential expenditures.

Depleting Reserves and Pressing Causes

The heightened likelihood of such drastic measures stems from the gradual depletion of financial reserves earmarked to bridge the budget gaps. The financial pressure exerted on these councils is largely attributed to increased demand for children’s social care services, following governmental mandates to accord these services equal priority with adult social care. Such mandates have necessitated the allocation of additional funding.

Other contributing factors include escalating inflation costs and wage hikes. Moreover, a looming surge in borrowing costs is poised to further intensify the financial crunch.

An Expanding Network of Crisis

Sigoma has revealed that it is aware of at least 12 other councils across the nation that are contemplating issuing a section 114 notice for the fiscal year 2023-24.

Roots of Financial Woes and Delayed Reforms

The financial instability experienced by local authorities has been a subject of concern for a prolonged period. The Institute for Fiscal Studies recently underscored the lack of investment in councils serving disadvantaged communities, primarily stemming from delays in the planned reform of allocation formulas by the government.

From Past to Present: An Escalating Predicament

Although the first section 114 notice was initiated by Hackney Council in 2000, the rate at which councils are declaring bankruptcy has surged significantly. Notably, Conservative-led councils like Thurrock and Woking, as well as Labour-administered ones like Croydon and Slough, have recently issued section 114 notices.

Calls for Urgent Action and Reforms

Sir Stephen Houghton, the chair of Sigoma and the Labour leader of Barnsley Council, has appealed to the government to acknowledge the considerable inflationary pressures faced by local authorities in the past year. He emphasized the need for additional funding to accommodate rising service costs and ensure effective service delivery.

A Broken Funding System

Houghton remarked, “The funding system is completely broken. Councils have worked miracles for the past 13 years, but there is nothing left.”

Government’s Response and Accountability

A government spokesperson noted that while councils maintain ultimate responsibility for their finances, the government has emphasized prudent management of taxpayers’ funds. The government has established the Office for Local Government to enhance accountability across the sector.

Financial Guarantees and Reform Commitments

To address the financial challenges, the government has introduced a one-off funding guarantee, aiming to provide each council with at least a 3 percent increase in core spending power before local decisions on council tax rates are made. Additional grants of approximately £2 billion have been allocated to bolster social care.

Innovation in Social Care

The government has also acknowledged the need for reform in children’s social care. With the publication of an implementation strategy and consultations for reform earlier in the year, the government plans to respond to these consultations by the end of September.

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